/
Analysis

Adding LNG to the Mexican Energy Mix

Wed, 01/25/2012 - 11:54

Total Mexican natural gas demand will increase by an average annual rate of 2.2% between 2011 (estimated 7.98 Bcf/day) and 2025 (estimated 10.78 Bcf/day), according to Energy Ministry projections. In order to diversify its energy sources and lessen its dependency on the US in the gas sector, Mexico has increased LNG imports from 250 Mcf/day in 2007 to 547 Mcf/day in 2010: a little above half of the natural gas imports arrived through pipelines in the latter year. Almost 37% of the delivered LNG imports in 2010 came from Nigeria, while 34.6% came from Indonesia and 20.3% from Qatar.

Mexico has two operational Liquefied Natural Gas (LNG) terminals, as well as one terminal in Manzanillo that will begin operations in 2012. The first LNG delivery to Mexico was made in 2006 to the Altamira regasification terminal on Mexico’s east coast.

In 2008, a second LNG regasification terminal followed in Mexico, but was located on the west coast in Baja California. The Energía Costa Azul terminal is owned by Sempra Energy and half of its capacity was leased to Shell International Gas Limited for 20 years. Sempra said that its part of the processing capacity would find its source in a liquefaction facility in Indonesia. LNG imports at the Energía Costa Azul terminal jumped from 6.99 Mcf/day to 195.99 Mcf/day between 2009 and 2010. Sempra said in 2008 that the plant had a processing capacity of 1 Bcf/day.

A third LNG regasification terminal is in the works and is supposed to start its operations soon in 2012. CFE hopes that the terminal, located in Manzanillo on the Pacific Coast, will be able to store up to 10.59 Mcf of LNG and will be able to provide the CFE with up to 500 Mcf/day of natural gas. The CFE announced in 2007 that the Spanish company Repsol had won a contract to supply LNG to the soon-tobe-completed terminal for 15 years. The contract’s pricing was set US$0.03 under the 91% mark of the Henry Hub index price, which had an annual average of US$6.95 per million BTU in 2007, according to BP’s Statistical Review of World Energy 2011, and was at US$2.60 per million BTU on January 27th 2012. Repsol said it would deliver LNG from a liquefying plant in Peru.

On a global level, LNG prices have significantly increased. In Japan, prices jumped from US$4.72 per million Btu in 2000 to US$10.91 per million Btu in 2010. In the European Union, LNG prices reached US$8.01 per million Btu in 2010; this compares to natural gas prices in the United States, under the Henry Hub index, of US$4.39 per million Btu in 2010. Generally speaking, US natural gas prices are significantly cheaper when exported by pipeline versus LNG. In 2010, the US exported 333 Bcf (approximately 333 trillion Btu) of natural gas to Mexico through pipelines at an average price of US$4.54 per million Btu.

When the first LNG terminal began operations in 2006, the natural gas price in the US (Henry Hub) was at an annual average of US$6.76 per million Btu. When the second terminal started up in 2008, the Henry Hub annual average price was even higher: US$8.85 per million Btu. It made sense at the time to have a strategy with the goal to depend less on gas from the US. However, considering that the Henry Hub natural gas price dropped to US$2.35 per million Btu by March 2012, it should be more attractive for Mexico in the short-term to import natural gas through gas pipelines from the US than to import LNG from other countries. For that reason, it is probable that LNG regasification quantities, at lease at the Altamira and Baja California terminals, will be less than previously expected as the terminals’ operators source cheaper gas to complete their contracts.